Power increase reduction is too late

Reserve Bank governor Gill MarcusJohannesburg, South Africa — 13 March 2012 – South African national power utility Eskom’s decision to accept a 16% tariff increase for the 2012/13 year, rather than the previously agreed 25.9%, has come too late to do more than limit the damage to inflation expectations.

So says Brait economist Colen Garrow, who claims that wage demands and price increases are based on expectations that generally become self-fulfilling.

IOL reports that Garrow said that although the effect of the lower increase would be positive, it would be negligible. “Prices have this habit of being sticky when they need to be adjusted lower. Goods and services had probably already been adjusted in anticipation of the full 25.9%, and will probably not be discounted fully by the smaller increase in electricity tariffs. Also, the price adjustment after the revision remains a large one,” he added.

But some economists see an earlier return to the Reserve Bank’s 3 to 6% target range for inflation.

In January bank governor Gill Marcus said consumer inflation would remain above the range for the rest of the year. And, in her statement after the monetary policy committee (MPC) meeting, she spoke of the damaging effect of electricity inflation, which was running at over 17% year on year. “The determination of administered prices should not act as an inhibitor to growth and investment,” she continued.

Pressure came from other sources, including President Jacob Zuma in his State of the Nation address, trade union federation Cosatu and private sector economists. Eskom apparently noted their views and asked for the initial increase, granted by the National Electricity Regulator of SA last year, to be reviewed.